Cable & Wireless twins top the leading fallers

It's not often a demerged business tops the fallers in the FTSE 100 and the FTSE 250 at the same time, but Cable & Wireless has managed it.

Cable & Wireless Worldwide - whose main business is confusingly in the UK - is down 2.65p at 80.4p, making it the biggest loser in the leading index. To be fair the company has gone ex-dividend, which more than accounts for the drop.

But its other half, split off in March, is faring even worse. Cable & Wireless Communications has fallen 3.55p to 57.6p and is the largest faller in the mid-cap index. It has also gone ex-dividend, but that does not make up for all of the fall. Not helping matters in the fact that Evolution Securities has just issued a sell note on the business, with analyst Steve Malcolm saying:

CWC's maiden set of results delivered headline "beats" on EBITDA and net debt, helped by favourable currency moves, a smattering of non-cash items (provision releases) and late payment of demerger costs.

Despite these headline beats, our concerns over poor cash performance and lack of adequate dividend cover were not resolved. The company signalled higher capital expenditure and tax going forward. We actually cut our free cash flow forecasts and now forecast that CWC's $210m dividend commitment is just 0.3 times covered in 2010/11. We recommend investors focus on CWC's "after everything" 3% free cash flow yield and 6.2 times enterprise value/ proportionate EBITDA: an unjustified premium to the sector, in our view. Our target falls 1p to 42p – which still implies a 5% free cash flow yield on our forecasts. Rich, for a business with an underlying 8% sales decline in 2009/10. Sell.